“It takes a kind of institutional patience — because the payoff from fundamental research usually doesn’t come in a quarter…or a year…or even sometimes in a decade — if it ever comes.
Not only that, but there are constant pressures on this kind of commitment. Shareholder expectations for higher returns don’t diminish when the economy stutters.
In these moments, the temptation is strongest to cut investments in skills and R&D. We’ve seen more than one example of that here in the Valley in recent years.
And yet, Tom Watson Sr. actually increased research investment during the Great Depression. And his son bet the business on the System/360… a bold move chronicled so powerfully here at the museum.” – Sam Palmisano, CEO IBM
The question of the importance of research and development is an interesting one. In the abstract, R&D seems important, even vital. In practice, however, its results are frequently uneven and often non-existent.
If we were to objectively look at the technology industry’s opinion of the importance of R&D, what might we look at? One metric might be R&D spend a function of revenue. As Asymco’s Horace Dediu pointed out, “Samsung spends 6.5% of sales on R&D. Apple spends 2.2%.” But how does that compare to the industry. Is Samsung high? Apple low? Or neither.
To explore this question we compiled the R&D and revenue numbers for an arbitrary collection of technology vendors for a five year period from 2005-2010. From these figures we prepared the time series motion chart (user guide [PDF]) below.
This graph addresses some of the questions above. Apple’s R&D spend is consistently among the lowest in our sample, for example, eclipsed periodically only by HP. But it generates more questions than it answers.
Example: if IBM prioritizes R&D, why are they consistently below the median five year spend of 12.8%? Conversely, why are VMware’s R&D costs so high, on a relative basis?
In general, however, the variation in R&D as a percentage of income is wide, ranging from 2.35% to 24.53%. Which is interesting. What’s more interesting is that there does not appear to be an obvious connection to market performance. If you compare the growth in mean share prices for the five year span to average R&D spend, there is no apparent correlation.
None of which is to say that R&D isn’t important; it is self-evident that the reverse is true. Much of what we take for granted today – from the processor to the LCD display to the mouse driven user interface – is the product of research and development. From a user’s standpoint, then, R&D is vital.
What the above suggests, however, is that R&D is relatively independent of financial performance for companies that conduct it, with the caveats that this is merely a five year sample and that the selection of vendors is arbitrary and cross-industry. Which in turn implies that Palmisano is correct, and that we should consider research and development separately, because the two may actually have little to do with one another.
Anyhow, explore the motion chart and see what patterns you can detect. Try pressing play, for example, and watching the R&D spend fluctuate over the last five years.
Disclosure: IBM and VMware are RedMonk customers, Apple is not.